What if the distortion is permanent . . . then what have we got?
Fans of the capitalist system say that, despite its flaws, it’s nonetheless the best because the market presents objective signals that can optimally guide investment allocation.
Prices are the objective signals.
Producers look at market prices when making production decisions (which, altogether, economists call “supply”). And consumers look at market prices when making consumption decisions (“demand”).
An idea is that the system, under laissez-faire mode, is self-regulating. Supply and demand determine price. Price guides production, consumption, and investment-allocation decision-making.
An idea is that, in its purest form, the system can be efficient to the point of “Pareto Optimality”:
https://en.wikipedia.org/wiki/Pareto_efficiency
Milton Friedman and Ayn Rand and Ludwig von Mises advised minimizing governmental intervention into the economy in order to keep price signaling as pure as possible.
Every governmental intervention (deus ex machina) distorts price signaling.
But the populace gets antsy when the system convulses in too much recession or too much inflation or too many market gyrations, etc. The power elites want things to be stable, smooth, no boat rocking. So the governments keep trying to intervene. More and more.
They know they’re distorting price signals. They keep calling their radical interventions “temporary” . . . emergency basis. Well, they went big with intervention after the crash of the tech bubble circa 2000. They went bigger after the crash of the real estate bubble circa 2008. They went bigger still after the Covid freeze-up.
The interventions prevent asset-price deflation (the nemesis of the central banks) but the situation is not benign. Asset price inflation benefits the 1% (who own the lion’s share of stock and bonds). The interventions exacerbate the already-egregious wealth/income disparities that characterize late capitalism.
And they distort the economy.
The powers-that-be are aware of this. They keep saying they intend to “normalize” . . . real soon. Interest rates should go back to normal (range of 3% to 6%). Federal government deficits should get back to reasonable. Central bank balance sheets should shrink back to accustomed levels.
They’ve been saying “we’ll normalize soon” for twenty years. What if they can’t? What if the system itself can’t generate enough growth anymore? What if its price signaling now is Pareto Dysfunctional?
Have we entered some new kind of economic era?
Deus forbid.
There is an increasing risk that central banks are facing a “no-exit paradigm” from quantitative easing. No central bank has managed successfully to reverse its asset purchases over the medium to long-term, and the key issue facing central banks as they look to halt or reverse quantitative easing is whether it will trigger panic in financial markets that spills over into the real economy.
